Cash Balance Plans, QLACs Gaining Thanks to New Treasury and IRS Regs

Treasury and IRS also issued final rules last July creating qualifying longevity annuity contracts, also known as deferred income annuities. The rules exempt QLACs from the required minimum distribution rules governing defined contribution plans and individual retirement accounts, which require holders of these accounts to begin taking withdrawals by age 70-½ (which is prior to the age longevity annuities are designed to begin income payments).

The EBRI analysis models two scenarios under which QLACs could be utilized as part of a 401(k) plan. The first scenario would attempt to convert 15% of the 401(k) balance with the current employer to a QLAC premium while simultaneously attempting to partially mitigate the risk of purchasing the product when interest rates are low.

The second proposal assumes (some) plan sponsors would be willing to convert the accumulated value of their 401(k) contributions to a QLAC purchase at retirement age on either an opt-in or opt-out basis for the employees.

“The analysis finds that, even at today’s historically low interest rates, the use of QLACs, through the transfer of longevity risk to the insurer, provides a significant increase in retirement readiness for the longest-lived quartile with only a small reduction for the general population,” said Jack VanDerhei, EBRI research director and author of the report. As part of EBRI’s 2015 Retirement Confidence Survey, workers were asked how interested they thought they would be at retirement in purchasing an insurance product with a portion of their savings that would begin providing guaranteed monthly income for the rest of the worker’s (or their spouse’s) life at some point in the future, such as age 80 or 85.

Eight percent of workers indicated they were “very interested,” 30% reported they were somewhat interested, 21% said they were not too interested and 38% said they were not at all interested.

Not surprisingly, EBRI states, the level of interest in purchasing a QLAC-type product “is strongly associated with the respondent’s perceived likelihood of living to age 85.” Nearly one-half (47%) of those who believed it was “very likely” that they would live until at least age 85 were either somewhat interested or very interested in purchasing such a product; however, this percentage dropped to 41% for those who believed it was “somewhat likely” that they would live until at least age 85.

One-quarter (25%) of those who believed that they were either “not too likely” or “not at all likely” to live until at least age 85 reported that they were interested in purchasing a QLAC-type of product at retirement.

Regardless of household income, workers ages 45 or younger were much more likely to be interested in purchasing such a QLAC product, the Retirement Confidence Survey found. “At least some of this age discrepancy could be attributable to public perceptions of the future solvency of Social Security. Retirement benefits paid by Social Security represent a major portion of the longevity protection for many retirees and the prospects of this benefit being modified when the Social Security Trust Fund is expected to be depleted in 2034 may provide an incentive for younger workers to consider a QLAC-type product as part of their individual risk management,” the report states.

The percentage of workers 45 or younger interested in a QLAC-type product is 40% for those who believed Social Security would be a major source of income in retirement, the report states. However, the percentage of those interested increased to 47% for those who believed it would be only a minor source of retirement income. The portion of those who expressed interest in a QLAC-type product increased to 59% for younger workers who believed Social Security would not be a source of income in retirement at all, the report says.

— Related on ThinkAdvisor:

• QLACs Change the Game in Social Security Timing
• The Fastest Growing Retirement Plan You Never Heard Of